Pensions
We’re all living longer, more active lives. Surely, worse than
being afraid of dying too young must be the fear of living too
long!
So, what should you do about planning for retirement and why is
it so important to plan?
Britain has an ageing population and we all can expect to live
longer than our forefathers.
The number of babies born each year remains constant whilst
there are more and more pensioners relying on a smaller and
smaller workforce to fund their State pensions. The single
persons’ current basic State pension is just £90.70 a week (2008-09
figures), and
that figure is set to fall in value compared to earnings in
coming years. On top of this there will be less and less State
pension money available to go around.
It is vital that we all make extra provision for our retirement
through some form of savings vehicle. To encourage people to
save for retirement, the Government allows very generous tax
breaks on pension contributions. Basic rate taxpayers receive
tax relief at 20% and higher rate taxpayers can receive relief
at up to 40% (although higher rate taxpayers will not
necessarily get 40% relief on single contributions). It makes sense to take advantage of a pension, one of the
most tax-efficient ways of investing you will ever find. If you
have an existing personal pension, when was the last time you
had a Personal
Pension Review?
The worst thing about pensions is their name. It conjures up all
the wrong pictures. Instead, think of it as something that will
pay you for not working later.
Personal Accounts
From 2012, all employers must offer a quality private scheme or
subscribe to a Government backed
NEST. Follow the link to our sister site for
full information.
What type of
pension scheme should I invest in now?
If you are employed and your employer runs a company pension
scheme it almost always makes sense to join it especially if
your employer makes contributions in addition to your own. If
your employer does not offer a company pension scheme, or if you
are self-employed, you should consider a Stakeholder or
personal pension plan.
If you are employed, you may be able to persuade your employer
to make contributions too.
You can contribute to as many Stakeholder or Personal Pension
plans as you like as long as you do not exceed the maximum
levels for contributions set by the Inland Revenue.
Stakeholder pensions were introduced in April 2001 to encourage
those on lower incomes to make private provision for their
retirement. They are generally available to anyone based in the
UK. Stakeholder pensions are available for both employed and
self employed people. For the first time, those without earned
income, including children (or someone on their behalf!) are able to save into a pension plan.
Most employers are obliged
by law to offer a Stakeholder pension scheme to employees
unless they already offer a pension scheme which meets certain
standards.
The aim was that Stakeholder pensions will be straightforward,
low-cost, flexible and transparent. The rules state that pension
providers cannot charge plan holders more than 1.5% for the
first ten years, then 1% in subsequent years.
Unfortunately, the very people that these plans were designed to
help have been less than eager to participate and the more
affluent have been quick to use them as very efficient tax
planning tools to provide pensions for grandchildren!

How much should
you contribute?
This depends on your age; be realistic. If you pay £50 a month
into a pension, then do you really think it will provide an
income of £20,000 a year when you retire? The arithmetic just
isn’t there! The most important thing is for you to increase
your contributions as your earnings increase. If you wish to maximise your occupational
pension scheme benefits you can do so by contributing to an
Additional Voluntary Contribution (AVC) scheme run by your
employer or a Personal Pension plan. The maximum contribution
that can be paid to all schemes is your annual earnings, up to
the £235,000 cap.
What income can
I look forward to?
From a traditional occupational final salary scheme, also known
as ‘defined
benefit’, the amount of income you can expect each year is
worked out using a set formula. The company might pay you, say,
1/60th of your final pay for every year you have worked there.
For example, if you have worked for 25 years and your final
salary is £25,000, you will receive 25/60ths of £25,000, which
is £10,417 a year.
If you are in an occupational money purchase scheme, also known
as ‘defined
contribution’, your contributions and those made by your
employer on your behalf are invested in funds, usually linked to
the stock market. The return on your investment depends mainly
on the performance and the type of funds you have chosen to
invest in. The same applies with Stakeholder and Personal
Pension plans. As with any long term investment, the value of
funds can go down as well as up and past performance is no
indication of future performance.
The Pensions Service have developed a guide and you can access
it by following this
link
Which is the
right choice for me?
If your employer offers a company scheme which they pay into on
your behalf, in most cases you should join it. Otherwise a
Stakeholder or a personal pension plan is a sensible method of
funding for retirement as these schemes will give you choices to
match your preferences. You can also set up different
types of pension plans should you want to, which was not allowed
pre April 2006.
The sooner you get started making realistic pension
contributions, the more comfortable your retirement is likely to
be. The pension’s world remains complex and baffling for many
consumers. Choosing the right pension provider, the most appropriate funds and agreeing an affordable level of contributions can be
difficult to decide by yourself. Under the simplified pension
regime from 6th April 2006 (A-Day), the limits to all pension
arrangements in terms of what can be paid in and taken out have
changed completely. We will be able
to tell you whether and how these changes impact on you and if you
need to take any action to protect your
pension provision.
What if I
already have a Personal Pension Plan?
A pension plan is an investment like any other, just with
different tax breaks and conditions. Many people still have
funds with providers that are now closed for new business and
are paying charges way in excess of the Stakeholder standard
and/or are in poorly performing funds or closed
with profit
funds which are paying virtually no bonus at all. Our section on
With Profit Bonds gives some background to this problem.
Independent advice is essential here as a specialist can analyse
your charges and funds and make recommendations for you to move
your funds - often at no cost at all to yourself.

When must I take my benefits and how will they be paid?
Some important changes were made to the pension benefit rules
from 6 April 2011. In particular is the welcome news that
pensions and lump sums no longer have to be taken by age 75. New
income drawdown rules replace the existing unsecured pension (USP)
and alternatively secured pension (ASP) rules, which have been
abolished.
A new type of income drawdown, known as flexible drawdown, is
available for those who meet the new minimum income requirement
(MIR). Existing USP and ASP cases will be gradually moved fully
onto the new basis under transitional rules. All is not good
news, however as the death benefit rules, and aspects of their
tax treatment, have changed.
After 5 April 2011, benefits don't have to be taken from a
registered pension scheme by the age of 75 - they can just be
left in the scheme as unused funds until the member needs them.
Where scheme rules allow, this gives members the flexibility to
delay taking their pension or tax-free lump sum until after age
75 - potentially even continuing a phased retirement strategy
into their 80s or beyond.
However, the benefits still have to be tested against the
lifetime allowance by age 75 (as a benefit crystallisation
event). So even though the member may not be taking anything
from their fund, if those unused funds are greater than the
remaining lifetime allowance, a lifetime allowance tax charge
will have to be paid. Any lifetime allowance charge incurred at
age 75 would be at the rate of 25%, with the residual excess
fund retained in the scheme to provide taxable pension income.
This also means that lump sum death benefits paid after age 75,
even from unused funds, will be subject to the 55% tax charge -
unless it's a charity lump sum death benefit (which can be paid
tax-free).
On 6 April 2011, the unsecured pension (USP) and alternatively
secured pension (ASP) rules were replaced by a new single set of
income drawdown rules that are similar to the current USP rules.
The key features of the new rules are as follows:
Income Limits
-
The highest income allowed in a pension year is 100% of the
basis amount from the Government Actuaries Department (GAD)
tables at all ages (down from the 120% USP limit, but up from
the 90% ASP limit).
-
The lowest yearly income allowed is nil (the same as the USP
rules, but significantly more flexible than the 55% minimum that
had to be taken under the ASP rules).
-
Those who meet the new minimum income requirement (MIR) may also
have the option of flexible drawdown, which allows unlimited
income to be taken at any time. At the moment you must have an
income, before drawdown, of > £20,000 per annum.
The GAD tables have been updated to reflect recent mortality
improvements and extended to cover ages after 75.
Income Reviews
Until age 75, the income limit must be reviewed at least every
three years. Previously this was every five years. Once over 75, the limit must be reviewed every year.
Death Benefits
For deaths after 5 April 2011, any lump sum death benefit paid
from an income drawdown fund (or after age 75 from unused funds)
are taxed at 55% (up from the 35% that previously applied under USP). Lump sums paid on or after 6 April 2011 as a result of a
death in USP before then will still be taxed at 35%.
However any lump sum death benefit is still tax free if paid
from uncrystallised rights but is normally taxed at 55% if paid
from crystallised rights (such as income drawdown funds or a
value protected annuity). The only exception is for charity lump
sum death benefits, which can be paid tax-free from crystallised
rights.
Where the individual dies after age 75, then the lump sum death
benefit paid after 75 (including those from unused funds) is
taxed at 55%.
People already in unsecured pension (USP) or alternatively
secured pension (ASP) before 6 April 2011 will be moved fully
onto the new income drawdown rules over a period of up to 5
years.
Inheritance Tax (IHT)
Before 6 April 2011, pension rights could create IHT liabilities
- albeit only in fairly limited circumstances. Two significant
changes were made from 6 April 2011 that make the risk of IHT
charges even smaller:
-
The abolition of the ASP rules mean that the IHT charges that
previously applied on death in ASP don't apply for deaths after
5 April 2011.
-
The ability for HMRC to levy IHT where they consider that
someone has deprived their estate through an "omission to act"
(for example, by delaying taking their pension) has been removed
for omissions after 5 April 2011.
Taking Benefits Early
Every year one delays taking a pension may well mean that the
fund continues to grow, but we can never, ever, live that year
again and benefit from the income lost. For many people, taking
benefits early makes good sense and we have developed a
calculator to illustrate how this could affect you. If you would
like us to discuss this with you, please
contact us.
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